UBS Wronged Investors in Lehman Bankruptcy

The recent 2,200 page examiner’s report on the Lehman Brothers bankruptcy continues to dig up more cans of worms.  Part of the report points to the misdeeds of UBS, a counterparty with Lehman.  UBS was alleged to have advised its clients to invest in Lehman structured notes, such as principal protected notes and other structured products, without obtaining collateral.

To make matters worse, UBS itself was loaning money to Lehman but at a high interest and stringently secured under a program called Repo 105.  UBS could arrange these loans favorable to itself because it knew of the dire straits Lehman was in financially.  Through Repo 105, Lehman could temporarily hide some of its potentially loss-making assets by ‘selling’ them to counterparties such as UBS.  But the money that UBS afforded to Lehman was backed by more than 100% of its value in collaterals.

Prior to Lehman’s collapse, UBS had full knowledge of the investment bank’s financial troubles.  For instance, UBS knew that Lehman was the lowest rated of the investments banks, that their Archstone deal turned out to be disastrous for Lehman, that Lehman’s bad assets had risen by some 300% between 2006 and the first quarter of 2008, that it had a huge amount of write-downs and that it financed more mortgage-backed loans in 2007 than any other bank which resulted in a high proportion of its total funds being tied down to risky assets.

As a result of UBS’ dealings with Lehman that heavily favored itself, UBS itself had less than $300 million in counterparty exposure when Lehman filed for bankruptcy in late 2008 while at the same time it profited massively from the billion dollar secured and high interest rate loans it gave to Lehman.

In the meantime, retail and institutional investors who have lost out by investing in Lehman’s structured notes can file a claim with the Financial Industry Regulatory Authority (FINRA) against UBS.  This has proved to be a worthwhile step to take as UBS has already lost in several claims made against it through FINRA.  Although UBS claims that the Lehman examiner’s report does not explicitly state that it had acted inappropriately, it is quite undeniable that it had ignored the clear signs of Lehman’s potential collapse as it continued to aggressively market Lehman’s structured notes.

To-date, many individual investors have sought to claim against UBS, both from within the US and internationally.